DP9132 Comparing behavioural and rational expectations for the US post-war economy
|Author(s):||Chunping Liu, Patrick Minford|
|Publication Date:||September 2012|
|Keyword(s):||bank crisis, behavioural expectations, indirect inference, rational expectations|
|JEL(s):||E17, E37, E47|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=9132|
The banking crisis has caused a resurgence of interest in behavioural models of expectations in macroeconomics. Here we evaluate behavioural and rational expectations econometrically in a New Keynesian framework, using US post-war data and the method of indirect inference. We find that after full reestimation the model with behavioural expectations is strongly rejected by the data, whereas the standard rational expectations version passes the tests by a substantial margin.